China and the World of Business • China Business and the World

Month: November 2005

…But for those of us who see massive intellectual property battles as good theatre, there is a battle coming that is sure to beat even the SCO – IBM infringement suit in terms of reams of press and depth of passion on both sides: the battle over TD-SCDMA.

…That then turns into a huge global debate about technology standards and royalties that will likely extend to intellectual property generally, forcing at some point in the next decade a WTO round on trade and protection of intellectual property and the role of IPR in global standards.

There is a small but rich cottage industry in Beijing built around the defense of intellectual property rights in China. There are legions of law firms, public affairs firms (not lobbyists in the pure sense of the word, but close), consultants, investigators, and the like in the business of helping global firms seek out infringers and try to get the enforcers to do something about it. At the moment, their collective attention is all turned to this 90-day anti-piracy search-and-destroy sweep through 15 provinces.

But for those of us who see massive intellectual property battles as good theatre, there is a battle coming that is sure to beat even the SCO – IBM infringement suit in terms of reams of press and depth of passion on both sides: the battle over TD-SCDMA.

For those not familiar with it, TD-SCDMA stands for Time Division Synchronous Code Division Multiple Access. Forget what that all means. Put simply, TD-SCDMA is an ostensibly Chinese developed cellular mobile system for delivering high-speed broadband over cellular. It competes with two other standards, CDMA-2000 1x, developed by Qualcomm, and WCDMA, developed by the Europeans with significant helpings of Qualcomm’s intellectual property.

TD-SCDMA possibly offers a few advantages over the other two standards, but apparently only if you build out a very dense network of base stations. It is quite telling that the world’s major cellular service providers aren’t even considering the standard. Apparently, whatever TD-SCDMA offers isn’t THAT much better than what’s already out there.

The Chinese claim that TD-SCDMA is totally locally developed. The folks at Qualcomm beg to differ, and say there are large chunks of Qualcomm technology in TD-SCDMA that require royalty payment. This really upsets the Chinese telecommunications policymakers who are backing the standard, since they see TD-SCDMA as an opportunity to stop having to pay royalties to foreigners.

A TD-SCDMA test network is rolling out starting this month. The Chinese want to go commercial with the technology next year. And that’s about the point when the legal battle would begin. And what a complex battle it would be.

Qualcomm has their claim, and has likely been preparing this case for several years. The Chairman of Qualcomm China, Wang Jing, is a U.S. educated attorney who came to Qualcomm from a white-shoe law firm in Washington. Jing is erudite, intelligent, has a proven talent for defusing the nationalist argument, and he knows the law. Expect Qualcomm to make him their front man in the battle. Qualcomm’s biggest strategic question will be to decide in which jurisdiction to file the suit, having to balance between winnability (almost anywhere outside of China) and enforceability (anywhere within China, including Hong Kong.)

Datang, the primary local developer, will fight back ferociously, both in the courts and in the court of public opinion. They know that the very success of their company depends in part on not having to pay foreign royalties, and that much of their status with the market and policymakers rests on the contention that they did it all themselves. Expect a massive counter-suit, possibly overseas, and a public relations campaign designed to smear Qualcomm with anything and everything.

The Chinese government is in a huge quandary. They want Datang to win this case, dodge having to spend hard currency on IP, and prove China’s technological prowess. At the same time, China is facing a potentially large and damaging case in the WTO over its continued failure to protect intellectual property. It must demonstrate to the world that companies can do business in China without fear of having their IP stolen. Assuming Qualcomm’s case has merit, letting the case go to trial in PRC courts is a no-win situation for China’s policymakers. If Datang wins in Chinese courts, observers will claim the verdict was fixed. If Datang loses, the government will not only look foolish for having supported Datang’s claims, they will be faced with the unpalatable choice of either compelling Datang and the local manufacturers to pay royalties, or openly defying international IPR conventions.

My bet is for the government to push for a quiet settlement.

So, here is how it will play out.

1. The MII announces 3G licenses, and the first ones go to carriers for TD-SCDMA networks.

2. Manufacturers start selling phones.

3. Qualcomm sues

4. Everyone makes a lot of noise for 6 months to two years.

5. All parties involved, battered in the public eye by the entire affair, wind up settling.

6. Lawyers collect massive fees.

7. Nearly all international manufacturers and most locals wind up paying royalties to Qualcomm on TD-SCDMA phones anyway.

8. We go into round two, where everybody and his brother get together to try to dictate to Qualcomm what royalties it can charge for its IPR.

9. That then turns into a huge global debate about technology standards and royalties that will likely extend to intellectual property generally, forcing at some point in the next decade a WTO round on trade and protection of intellectual property and the role of IPR in global standards. Indeed, the discussion is likely to attack the broader question of rationalizing copyright, trademark, and patent law around the world, on enforcement, and fair use.

Get ready. Qualcomm vs. Datang over TD-SCDMA will help start the most important global legal battle of the 21st century.

Steve just sent me a release about a study Pyramid has just done asking wireless subscribers in Brazil, Russia, India, and China whether they would pay for wireless data services or not. Apparently the Russians will pay $4.23, the Indians $1.50, and the Brazilians and Chinese around $4.

It’s surveys like these that reenforce my belief that the vast majority of market research is meaningless.

The problem with asking a consumer whether they would use – and pay for – a service is that the consumer has no idea in his or her mind exactly what you’re talking about.

That’s like saying “would you pay for a digital cable system?” How can anyone answer that question signt unseen?

On the other hand, show a customer a sample of a service and ask “would you pay for this service” and “how much”, THEN you have research that can tell you something. You can even ask things like “why not” and “how would you change this?”

Say to a guy “look, if we could put real-time stock quotes of your portfolio onto your mobile screen, would you pay $5 per month for that? Here’s what it would look like on your phone and on this Motorola PDA phone. What do you think?”

Of course, that would require the folks at Pyramid, Jupiter, and the other research houses to actually do something more than cook up questions, find people to ask, crunch data, and turn out reports. Heaven forbid these esteemed houses change their vaunted and timeworn methodologies JUST to get a more realistic answer. I mean, why bother? All they REALLY want is headlines.

Now, because I’ve known some really smart people at these places, I’m going to take a flyer and assume that they’d really like a better way of doing research. I’m going to suggest several different possible services they can use in their surveys – or as starter material for their own ideas:

17. Home Check, the ability to check on the alarm status of your home, and possibly even see a video of your child.

18. Child-tracker, seeing at any time where your child is.

19. Printing for photos taken by the phone.

20. Ebay auction monitor function

21. Weather status, forecast, and severe weather tracker.

22. SportsDay, like Major League Baseball’s Gameday service online.

There you are gents. Some service ideas that you can take to the nearly 3 billion consumers in the BRIC countries. They may love them all. They may hate them all. But at least you’ll get some meaningful data.

Baidu has apparently signed agreements with no less than 16 local recording labels to give away for free online the songs of about 100 performers.

Uh, hello?

Did anybody consult the performers about this?

Supposedly Baidu did this as a slap at the big global players. In the end, though, this is going to backfire, because eventually the artists are going to realize that they’re getting the short end of this deal and tell the local recording companies where they can stick their little agreement. Well, maybe not ALL artists, but any that are commercially viable and thus worth keeping are not going to be happy. And if the music is all from artists who nobody knows or cares about, none of this will be very much help to Baidu anyway.

The Internet fundamentally weakens the labels. Despite his close cooperation with the big recording labels, one thing Steve Jobs realized very early in the iTunes saga is that the silent power behind the online media revolution is the artists themselves. Every single move in the iTunes business model is implicitly designed to reward and empower the artists.

In China, you don’t have anything like the Supreme Court and the associated body of intellectual property law and precedent to protect artists. So the artists are going to have to protect themselves.

All of a sudden, the performers signed to contracts with TR Music and its fellow members of Baidu’s Pan Music Alliance look like the IPR equivalent of sharecroppers. And I’ll bet they don’t sit still for it for long.

Technology. The power to make a good deal with your label, or simply to tell your label to get stuffed and go direct yourself.

Jonathan Landreth did an excellent piece on the Ministry of Culture’s circular requiring authorities in 15 major Chinese cities and provinces to spend the next 90 days cracking down on piracy and pornography. THis was apparently in advance of Bush’s visit (“See, Dubya? We’re tough hombres on pirates”) and in response to the WTO demand on Chin to prove it’s getting tougher on pirates.

All public relations value of such activities aside, one feels compelled to prevail upon the esteemed comrades at the Ministry of Culture about the potential efficacy of such an activity.

> Why only 15 cities and provinces? Why not everywhere? Does this mean to ignore nearly half the provinces in the country? Talk about a loophole so big you could fly a large asteroid through. They even NAME the provinces and leave out such notorious centers of piracy as Hainan and the entirety of the northeast. Attention all pirates and pornographers: please move here for the next 90 days. Thanks.

> As much respect I have for the Ministry of Culture, I have to wonder whether the nation’s police forces really feel compelled to drop everything they’re doing and follow an MoC directive. Would it not have been more compelling to the police forces of the land for this to come from the PSB?

> Question: After 90 days, then what? Business as usual?

Jonathan also points out the sheer stupidity of announcing this all IN ADVANCE of the enforcement effort. They may as well phone the factories before coming by. (Or maybe they do that, too?)

This all has the look of a cross between a PR opportunity and a Vietnam-era search-and-destroy operation. High fives for the cameras, but the bad guys will get away. And it almost looks like that is what the authorities want to happen.

Will sent me an interesting article from eWeek talking about SGI, basically saying that SGI was a leader at one point, but got whomped when it failed to catch key trends.

The article points out that there are lessons here for many companies. I would say Lenovo ranks high among them. Lenovo is missing some key trends in what it is doing:

• ThinkPads are back, but they are every bit as ugly as they were 10 years ago. The real contenders in this business recognize that people are no longer satisfied with the utility of their laptops – they want them to look good as well. I hear in my ear the voice of Henry Ford telling people they could have any color car they wanted, as long as the color was black. Al Sloan down the road at GM started offering pastels and other choices, and Henry Ford permanently lost the lead in the very industry it created.

• Computer sales and internet registrations in China are starting to plateau. This does not bode well for growth in China, which has been Lenovo’s traditional engine of growth.

• Lenovo’s traditional strength is in homes, IBM’s (in China, at least) is in large enterprises. but the real locus of growth for computers is small- and medium-sized business, a sweet spot that falls into the gap between the competencies of both organizations.

• The channels that account for a growing percentage of business – computer mall-based shops on the consumer side, small system-integrators for business – also have closer relationships to rivals. IBM has sold through higher-end shops and system integrators, and Lenovo’s focus has always been retail-based direct. Fundamentally, a channel organization is critical.

• There is no brand loyalty in China, so abandoning the IBM brand won’t cost Lenovo much here. But in the places where brand means a hell of a lot – especially if you want to be a little something more than a commodity, the decision to abandon the IBM brand is going to hurt Lenovo.

• Lenovo appears to have no strategy for building a customer base in the gigantic low-income market in Asia. China, for example, only has something around 20 million home computers and 108 million Internet users. That means 350 million homes without computers and 1.3 billion without Internet access in China alone – the issue is no less serious in India, Indonesia, the Philippines and elsewhere. And this is a market Lenovo is ignoring.

There has been a great deal of buzz in the business media lately about how vision has been overrated and execution overlooked. In the wake of the dotcom bust, there was plenty of evidence of that, and the discussion fell on receptive ears.

But overlooking vision completely on behalf of execution means that the ship is running smoothly, but you have no idea what the weather is and where you’re going. SGI gives proof to how dangerous that can be.

Lenovo is among the best-run companies in China, and with the expertise of IBM, has the opportunity to become the most operationally excellent company in the computer business. The only problem is, that’s not going to be enough to keep it out of SGI’s shoes.

Say what you want about Friedman, he hits on a critical point most of us lifelong urbanites tend to miss: China is destroying farmland not only through urbanization and water pollution, but by outmoded agricultural practices driven by outdated policies. Rural economic reform, the place where Reforming and Opening began, has stalled. In many respects, policymakers have forsaken farmers to build cities and industries.

The issues Friedman touches circle but do not hit on the real story. I don’t think it would be an exaggeration to suggest that we are seeing the early danger signs of a hollowing-out of large chunks of China’s agricultural economy.

Some may suggest this is an inevitable step in modernization, and that’s fair. But I’d look at it another way. If there is a way to keep those farmers who aren’t interested in an urban life on the farm and offer them a way to participate in the kind of growth that China’s secondary and tertiary industries are enjoying, wouldn’t that be a good thing?

Let’s look at it another way. China’s cities are supposed to absorb 10 million rural migrants a year for decades to come. With the end of the Hukou system, that number might well grow. An outright rush to urbanization will bring problems China is unprepared to handle. Why not moderate that rush by creating more opportunities on the farm? Who knows? Apply a little microfinancing and some appropriate technology, and we may wind up with a bit of a green revolution in cash crops.

I’ve been having long talks with Hanya Kim and her beau Sagi over at Netafim about this stuff. Stay tuned for more on agriculture and technology.

So we’ve all been told – in not quite so many words – that luxury hotels in China are suspected targets for Islamic suicide bombers in the coming days. As we all rush to reschedule our lunch meetings away from such venues, an awful reality begins to take shape. Our years of feeling safe from the Global War On Terror in our comfy homes behind the Bamboo Curtain have now officially ended.

Which brings us to the more critical subject.

The China hawks on Capitol Hill and in the Pentagon continue to do all they can to make China the big global security boogeyman that it isn’t and probably won’t be for several decades in order to justify some very pricey weapons systems. The F-22 Raptor, coming in at around $100 million per plane. A water-skimming amphibious APC for the Marines costing $7 million each. New super-destroyers for the Navy that the Pentagon hopes will wind up costing only $750 million each by the time the fifth one gets built. Indeed, the need for a convincing, large, scary enemy is pretty clear, and big bad old China gets drafted.

Meanwhile, the Chinese defense establishment, taking more than a page or two out of the US book, are using up the procurement-based paranoia that is building up inside the Beltway (and its resulting ham-handed diplomacy) as justification for creating its own brand of anti-US paranoia inside Third Ring Road.

As all this posturing and procuring is taking place, both groups are missing the point. The real threats are not each other, but the ones that threaten both countries.

> The growth of global terrorism that threatens to engulf just about every country in the world, Islamic, non-Islamic, western, and eastern;> Piracy in the Indian Ocean and the Straits of Malacca that threaten the world’s supply lines of petroleum;> Nuclear proliferation;> The growing threat that rogue states represent to the international system that both China and the U.S. rely upon for their own continued prosperity.

The threat against China should be recognized for what it is – a wake up call to the U.S. and China that the real enemies are the threats to the system. There are two levels of response to that threat – tactical (find the bad guys and take them out) and strategic (attack the root cause of terror, piracy, proliferation and rogue statehood.) Until the U.S. and China set aside their mutual issues and jealousies and recognize that the problem will only be beaten if they’re both on the same team together, we are all going to live in a world where you cannot run from the danger.

I can certainly understand (but not condone) the desire of the Chinese government to restrict access to certain websites. I recognize that the nation’s leaders see this as a fragile polity, and for that reason they see the need to restrict access to sites of certain quasi-religious groups, sites whose content may incite unrest, and sites whose prurient content is of highly questionable moral value.

Hell, I can even understand the government blocking this blog.

But can anyone explain to me what possible justification there is to block access to the U.S. Social Security Administration? Is there something somehow subversive going on at the SSA? Is passing out checks to retirees really a front for a huge covert ops/black helicopter conspiracy to take over the world?Even in these days of Libby, Rove, Rumsfield and Cheney, I’d have to say that’s a bit paranoid. For crying out loud, there’s probably more objectionable content on the White House site , and that’s no blocked.

On the other hand, this could be the U.S. government blocking access. I know, for example, that any attempt to access .mil domains in the U.S. from China is blocked at one end or the other, and my money would be on that blockage occurring on the Pentagon end of the tube.

This is what it is like to be a web surfer in China. For whatever reason, both the Chinese and the Americans want to limit what we see.

There could possibly be no plainer proof than this story that China’s bureaucrats have yet to figure out exactly what the phrase “market mechanism” means. Clearly, the Central Party School needs to be teaching a little less Marxism-Leninism-Maoism-Dengism-Jiangism and a bit more Adam Smith.

I’m sure to some mid-level bureaucrat over at the MII desperate to justify his job thought that 45 sounded like a much more responsible number of manufacturers than 65 for a scientifically socialist market economy like China. And maybe he’s right.

But why not wait and let the market decide? Let’s not forget, after all, that China is rapidly becoming the global center of handset manufacturing, and that consumers worldwide are driving the market to diversify. We are very early in the game in the handset manufacturing industry in China, and making arbitrary decisions about who should be allowed to continue in business and who should not.

What is worse, the article appears to imply that the choice will be made based on scale. What about the companies that are small and not producing a lot of phones, but have some great ideas, designs, and talent, and could in the future stomp the likes of Nokia?

And let’s toss one final factor into the mix. By artificially restricting the number of competitors in the market in China, the government is increasing the likelihood that future competitors are likely to come from elsewhere. India, perhaps?

This amounts to a thinly-disguised effort to subsidize the 45 remaining producers, the very kind of mollycoddling China joined the WTO to eliminate. You don’t create national champions that will become global powerhouses by limiting the competition, something Zhu Rongji and reformers in government understand. Shutting down 20 mobile phone manufacturers will not strengthen those remaining – it will weaken them.

Apart from the fact that this has the potential of taking all of the fun out of an omelet or a breakfast buffet, it turns out that the greatest danger to egg eaters is not what’s inside the egg, but the feces and excreta on the shell.

Sure, we can wash our eggs. But why do people outside the poultry processing industry have to come into contact with chicken poop?

If nothing else, this situation is a guttural scream for restructuring of the food processing and retailing sector. I don’t mind my books or my clothes being “disintermediated,” but I’d just as soon put somebody who is going to take care to make sure that the food products don’t bring death and disease in a concentrated form into 400 million homes around the country between my breakfast table and the farmer.

I am frequently asked by people planning to move to China and do business here what they should do to prepare themselves for the experience.

I’ve always had a good reading list, but it has leaned heavily on the more realistic tomes, with a little light fiction to prevent people from going into deep depression before boarding the plane to come here. Once you made your way through, you may still think you can make a go of it in China, but at least you would be under no illusions that it would be easy.

My list includes:

James Clavell’s Tai-Pan and Noble House to show how even the smartest gweilohs can be swindled, and to provide some light entertainment.

Sidney Rittenberg’s The Man Who Stayed Behind to understand that the Chinese may seem to love you today, but they may darn well be spitting on you tomorrow.

Joe Studwell’s The China Dream to show you that just when you think you’re succeeding, you may actually be on the verge of crash-and-burn.

There are plenty of other books, obviously (Mr. China pops into mind), but I’d certainly suggest those.

I’d also suggest the better China blogs, which you will find listed as “Heroes of the People” near the top of this page.

Finally, and perhaps most important, for the executive seeking to truly understand what it takes to succeed in China, among all of the reading I’d intersperse a full, marathon viewing of the HBO Original Series Deadwood Perhaps more than anything else, this single work captures what it’s like to operate in China. (Thanks to Tom Barnett for the suggestion.)

A barely noticed article in the SCMP on Halloween noted that production in Hong Kong’s film industry in 2006 will drop to a mere 40 films, down from 62 in 2004 and 50 this year.

While the article suggests the cause of Hong Kong’s decline is a surge in South Korea’s film industry, given that the reportage came out of a conference in South Korea, I’m inclined to read a bit of self-congratulation in that analysis. The truth is probably a lot simpler and, in many ways, less comfortable for the Hong Kong industry.

The ugly, unspoken truth about Hong Kong cinema is that when it comes to developing new markets for it’s product the industry has spent the last three decades resting on its collective laurels.

Since the mid-1970s, U.S., Korean, Japanese, Mainland, and even Indian film studios have been working to build global markets and develop “crossover” movies that will draw international audiences. Hong Kong, meanwhile, has only been too happy to continue to crank out productions with strong local appeal but an almost conscious disregard of international tastes. Films from the mainland, the U.S., and elsewhere began creeping into Hong Kong’s shrinking number of theaters and the territory was (finally) wired with cable, shrinking the local market. The better directors and stars have at least partially decamped to the U.S. and the mainland, where they find not only better financing regimes, craftspeople, and facilities, but also a global stage for their work.

Hong Kong cinema fell into its navel 20 years ago and hasn’t lifted its head out since. It’s sad, but it stands as a warning to any company that pins its future on Hong Kong somehow remaining more than just another Chinese city, albeit a well-developed one.